##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-53198
 Merchants & Marine Bancorp, Inc.
  Mississippi
    
    26-2498567(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)3118 Pascagoula Street, Pascagoula, Mississippi
    
    39567(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ




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TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 4. Controls and Procedures
    
    
    34Part II. Other InformationItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. (Removed and Reserved)
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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Part 1. Financial Information
 
 Item 1. Financial Statements
 MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
 (Unaudited)
    
    
    (Audited)September 30, 2010
    
    
    December 31, 2009ASSETS:Cash and due from banks (non-interest bearing)
    
    $
    23,361,926
    
    
    
    14,451,113Federal funds sold
    
    
    10,070,000
    
    
    
    16,450,000Securities:Available for sale, at fair value
    
    
    105,529,612
    
    
    
    33,325,635Held to maturity, at amortized cost
    
    
    125,245,350
    
    
    
    143,957,199Non-marketable equity securities
    
    
    900,060
    
    
    
    900,060Loans, less allowance for loan losses of $3,061,194
and $3,100,000, respectively
    
    
    213,725,672
    
    
    
    207,113,223Property and equipment, net of depreciation
    
    
    16,021,837
    
    
    
    16,778,718Other real estate owned
    
    
    2,011,293
    
    
    
    2,194,611Accrued income
    
    
    2,394,144
    
    
    
    2,499,639Other assets
    
    
    13,564,861
    
    
    
    12,803,687TOTAL ASSETS
    
    $
    512,824,755
    
    
    
    450,473,885LIABILITIES AND STOCKHOLDERS EQUITY:Deposits:Non-interest bearing demand
    
    $
    81,337,547
    
    
    
    77,614,260Interest bearing demand, savings, money market, and
other time
    
    
    352,304,535
    
    
    
    305,253,753Total deposits
    
    
    433,642,082
    
    
    
    382,868,013Federal funds purchased and securities sold under
agreements to repurchase
    
    
    14,089,271
    
    
    
    8,433,632Accrued expenses and other liabilities
    
    
    11,363,282
    
    
    
    8,187,322Total liabilities
    
    
    459,094,635
    
    
    
    399,488,967Stockholders Equity:Common stock  $2.50 par value; 5,000,000 shares authorized;
1,330,338 shares issued and outstanding
    
    
    3,325,845
    
    
    
    3,325,845Surplus
    
    
    14,500,000
    
    
    
    14,500,000Retained earnings
    
    
    38,203,704
    
    
    
    35,560,524Accumulated other comprehensive income:Unrealized gain on securities available for sale
    
    
    317,306
    
    
    
    215,284Unrealized (loss) on defined benefit pension plan
    
    
    (2,616,735
    )
    
    
    (2,616,735
    )Total stockholders equity
    
    
    53,730,120
    
    
    
    50,984,918TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    512,824,755
    
    
    
    450,473,885
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MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009Interest Income:Interest and fees on loans
    
    $
    3,452,343
    
    
    $
    3,593,991
    
    
    $
    10,540,316
    
    
    $
    10,534,444Interest on investment securities:Taxable
    
    
    1,311,584
    
    
    
    1,254,449
    
    
    
    3,856,713
    
    
    
    4,240,468Exempt from federal income tax
    
    
    197,354
    
    
    
    128,094
    
    
    
    511,086
    
    
    
    318,751Interest on federal funds sold
    
    
    12,947
    
    
    
    11,228
    
    
    
    52,163
    
    
    
    46,866Total interest income
    
    
    4,974,228
    
    
    
    4,987,762
    
    
    
    14,960,278
    
    
    
    15,140,529Interest Expense:Interest on deposits
    
    
    858,791
    
    
    
    1,216,944
    
    
    
    2,773,932
    
    
    
    3,875,580Interest on federal funds purchased
and securities sold under agreements
to repurchase
    
    
    5,610
    
    
    
    9,538
    
    
    
    17,634
    
    
    
    31,337Total interest expense
    
    
    864,401
    
    
    
    1,226,482
    
    
    
    2,791,566
    
    
    
    3,906,917Net interest income
    
    
    4,109,827
    
    
    
    3,761,280
    
    
    
    12,168,712
    
    
    
    11,233,612Provision for loan losses
    
    
    208,819
    
    
    
    304,367
    
    
    
    584,925
    
    
    
    439,250Net interest income
after provision for loan losses
    
    
    3,901,008
    
    
    
    3,456,913
    
    
    
    11,583,787
    
    
    
    10,794,362Non-Interest Income:Service charges
    
    
    1,192,559
    
    
    
    1,137,849
    
    
    
    3,338,876
    
    
    
    3,106,713Miscellaneous
    
    
    614,823
    
    
    
    491,026
    
    
    
    1,810,185
    
    
    
    1,594,547Total non-interest income
    
    
    1,807,382
    
    
    
    1,628,875
    
    
    
    5,149,061
    
    
    
    4,701,260Non-Interest Expense:Salaries and employee benefits
    
    
    2,024,877
    
    
    
    2,007,562
    
    
    
    5,946,600
    
    
    
    5,882,669Premises
    
    
    793,317
    
    
    
    793,035
    
    
    
    2,336,057
    
    
    
    2,355,672Miscellaneous
    
    
    803,838
    
    
    
    1,150,521
    
    
    
    3,688,029
    
    
    
    3,705,507Total non-interest expense
    
    
    3,622,032
    
    
    
    3,951,118
    
    
    
    11,970,686
    
    
    
    11,943,848Income before income taxes
    
    
    2,086,358
    
    
    
    1,134,670
    
    
    
    4,762,162
    
    
    
    3,551,774Provision for income taxes
    
    
    636,055
    
    
    
    269,567
    
    
    
    1,388,414
    
    
    
    1,105,711NET INCOME
    
    $
    1,450,303
    
    
    $
    865,103
    
    
    $
    3,373,748
    
    
    $
    2,446,063NET INCOME PER COMMON SHARE
    
    $
    1.09
    
    
    $
    0.65
    
    
    $
    2.54
    
    
    $
    1.84
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MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    1,450,303
    
    
    $
    865,103
    
    
    $
    3,373,748
    
    
    $
    2,446,063Other comprehensive income, net of tax:Unrealized holding gains (losses)
arising during period
    
    
    82,019
    
    
    
    267,741
    
    
    
    102,022
    
    
    
    4,088Comprehensive income
    
    $
    1,532,322
    
    
    $
    1,132,844
    
    
    $
    3,475,770
    
    
    $
    2,450,151
   5




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MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
 AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    
    OtherShares
    
    
    
    
    
    
    
    
    
    

    Retained
    
    
    ComprehensiveIssued
    
    
    Amount
    
    
    Surplus
    
    
    Earnings
    
    
    Income (Loss)Balance, December 31, 2009, as originally
reported
    
    
    1,330,338
    
    
    
    3,325,845
    
    
    
    14,500,000
    
    
    
    35,560,524
    
    
    
    (2,401,451
    )Prior period adjustment to correct under-
statement of other real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333,707
    
    
    
    Balance, December 31, 2009, as restated
    
    
    1,330,338
    
    
    
    3,325,845
    
    
    
    14,500,000
    
    
    
    35,894,231
    
    
    
    (2,401,451
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,373,748
    
    
    
    Cash dividends, $.80 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,064,275
    )
    
    
    Change in unrealized gain (loss) on
securities avaliable-for-sale, net of
taxes of $52,557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,022Balance, September 30, 2010
    
    
    1,330,338
    
    
    $
    3,325,845
    
    
    
    14,500,000
    
    
    
    38,203,704
    
    
    
    (2,299,429
    )
   6




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MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY    For the Nine Months Ended September 30,
 2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    3,373,748
    
    
    $
    2,446,063Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,067,124
    
    
    
    1,083,831Provision for loan losses
    
    
    584,925
    
    
    
    439,250Write-down of other real estate owned
    
    
    
    
    
    
    80Net premium amortization
    
    
    75,300
    
    
    
    50,234Reinvested earnings on securities
    
    
    (1,581
    )
    
    
    (46,490
    )Decrease in accrued income receivable
    
    
    105,495
    
    
    
    652,102(Decrease) in interest payable
    
    
    (22,661
    )
    
    
    (239,714
    )(Gain) on disposition of property and equipment
    
    
    (681,652
    )
    
    
    (49,243
    )(Gain) on sale of securities
    
    
    (350,761
    )
    
    
    Net change in other assets and liabilities
    
    
    2,783,992
    
    
    
    (413,020
    )Net Cash Provided by Operating Activities
    
    
    6,933,929
    
    
    
    3,923,093CASH FLOWS FROM INVESTING ACTIVITIES:Net (increase) decrease in Federal funds sold
    
    
    6,380,000
    
    
    
    (4,661,000
    )Purchase of securities available for sale
    
    
    (138,326,691
    )
    
    
    (53,261,965
    )Proceeds from sales and maturities of securities available for sale
    
    
    66,632,500
    
    
    
    34,315,000Purchase of securities held to maturity
    
    
    (100,186,317
    )
    
    
    (101,026,393
    )Proceeds from maturities of securities held to maturity
    
    
    118,820,000
    
    
    
    107,362,593Purchase of other equity securities
    
    
    
    
    
    
    (300,000
    )Net (increase) decrease in loans
    
    
    (6,912,836
    )
    
    
    (12,221,878
    )Purchase of property and equipment
    
    
    (107,048
    )
    
    
    (440,847
    )Proceeds from sale of property and equipment
    
    
    710,940
    
    
    
    29,345Net Cash (Used) in Investing Activities
    
    
    (52,989,452
    )
    
    
    (30,205,145
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    50,774,069
    
    
    
    29,198,741Net increase in federal funds purchased and securities
sold under agreements to repurchase
    
    
    5,655,639
    
    
    
    (2,863,419
    )Dividends paid to stockholders
    
    
    (1,463,372
    )
    
    
    (1,463,372
    )Net Cash Provided by Financing Activities
    
    
    54,966,336
    
    
    
    24,871,950Net Increase (Decrease) in Cash and Due from Banks
    
    
    8,910,813
    
    
    
    (1,410,102
    )Cash and Due From Banks, Beginning
    
    
    14,451,113
    
    
    
    18,065,881Cash and Due From Banks, Ending
    
    $
    23,361,926
    
    
    $
    16,655,779
   7




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MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Interim Financial Statements.
  December 31, 2009 Balance Sheet Presentation.
  Use of Estimates.
  2. FAIR VALUES OF FINANCIAL INSTRUMENTS
  Cash and Federal Funds Sold:
  Investment Securities:
  Loans:
  Deposits:
   8




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MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
 2. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
  September 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and federal funds sold
    
    $
    33,432
    
    
    
    33,432
    
    
    $
    30,901
    
    
    
    30,901Securities:Available-for-sale
    
    
    105,530
    
    
    
    105,530
    
    
    
    33,326
    
    
    
    33,326Held-to-maturity
    
    
    125,245
    
    
    
    128,228
    
    
    
    143,957
    
    
    
    145,326Non-marketable
    
    
    900
    
    
    
    900
    
    
    
    900
    
    
    
    900Loans, net of allowance
    
    
    213,726
    
    
    
    213,935
    
    
    
    207,113
    
    
    
    206,563Financial liabilitiesDeposits
    
    
    433,642
    
    
    
    434,738
    
    
    
    382,868
    
    
    
    382,586Federal funds purchased and securities sold
under agreements to repurchase
    
    
    14,089
    
    
    
    14,089
    
    
    
    8,434
    
    
    
    8,434
 3. DEFINED BENEFIT PENSION PLAN
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net periodic benefit cost (income):Service cost
    
    $
    101
    
    
    
    80
    
    
    $
    303
    
    
    
    240Interest cost
    
    
    151
    
    
    
    147
    
    
    
    453
    
    
    
    441Expected return on plan assets
    
    
    (165
    )
    
    
    (137
    )
    
    
    (495
    )
    
    
    (411
    )Amortization (gain)/loss
    
    
    68
    
    
    
    84
    
    
    
    204
    
    
    
    252Net periodic pension expense:
    
    $
    155
    
    
    
    174
    
    
    $
    465
    
    
    
    522
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4. SUBSEQUENT EVENTS
   10




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Forward-looking Statements
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Formation of Holding Company
   11




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Executive Summary
 U.S. Banker th
    Earnings Highlights
   12




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Earning Assets
  Net Interest Income
     13




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Interest Rate Sensitivity
    Loans
   14




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Allowance for Loan Losses
    Critical Accounting Policies
   15




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Asset Quality
   16




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Securities Available-for-Sale and Investment Securities
     17




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Deposits
  Liquidity
   Contractual Obligations
  Off-Balance Sheet Arrangements
   18




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Risk-Based Capital/Stockholders Equity
    Non-Interest Income
    19




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Non-Interest Expense
   Income Taxes
   20




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TABLE 1
 COMPARATIVE AVERAGE BALANCES  YIELDS AND RATES
  2010
    
    
    2009
    
    
    2008Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Assets
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    RateInterest earning assets:Loans, net of unearned
income
    
    $
    214,411
    
    
    $
    10,447
    
    
    
    6.50
    %
    
    $
    207,781
    
    
    $
    10,534
    
    
    
    6.76
    %
    
    $
    199,279
    
    
    $
    11,130
    
    
    
    7.45
    %Securities held to
maturity:Taxable
    
    
    133,322
    
    
    
    2,974
    
    
    
    2.97
    %
    
    
    97,754
    
    
    
    3,091
    
    
    
    4.22
    %
    
    
    155,261
    
    
    
    5,600
    
    
    
    4.81
    %Exempt from Federal
income tax
    
    
    22,017
    
    
    
    575
    
    
    
    3.48
    %
    
    
    12,583
    
    
    
    319
    
    
    
    3.38
    %
    
    
    8,472
    
    
    
    223
    
    
    
    3.51
    %Securities available
for sale:Taxable
    
    
    43,287
    
    
    
    882
    
    
    
    2.72
    %
    
    
    52,187
    
    
    
    1,122
    
    
    
    2.87
    %
    
    
    22,650
    
    
    
    590
    
    
    
    3.47
    %Other interest earning
assets
    
    
    30,710
    
    
    
    67
    
    
    
    0.29
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %Federal funds sold
and securities purchased under agreements to resell
    
    
    8,620
    
    
    
    7
    
    
    
    0.11
    %
    
    
    34,980
    
    
    
    47
    
    
    
    0.18
    %
    
    
    30,799
    
    
    
    587
    
    
    
    2.54
    %Total interest-earning
assets
    
    $
    452,367
    
    
    $
    14,952
    
    
    
    4.41
    %
    
    $
    405,285
    
    
    $
    15,113
    
    
    
    4.97
    %
    
    $
    416,461
    
    
    $
    18,130
    
    
    
    5.80
    %Non interest earning
assets:Cash and due from
banks
    
    
    17,138
    
    
    
    
    
    
    
    
    
    
    
    16,804
    
    
    
    
    
    
    
    
    
    
    
    25,934Bank premises and
equipment
    
    
    16,337
    
    
    
    
    
    
    
    
    
    
    
    17,568
    
    
    
    
    
    
    
    
    
    
    
    15,608Other assets
    
    
    18,341
    
    
    
    
    
    
    
    
    
    
    
    14,136
    
    
    
    
    
    
    
    
    
    
    
    14,853Allowance for possible
loan losses
    
    
    (3,098
    )
    
    
    
    
    
    
    
    
    
    
    (3,085
    )
    
    
    
    
    
    
    
    
    
    
    (3,086
    )Total assets
    
    $
    501,085
    
    
    
    
    
    
    
    
    
    
    $
    450,708
    
    
    
    
    
    
    
    
    
    
    $
    469,770
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TABLE 1 CONTINUED
 COMPARATIVE AVERAGE BALANCES  YIELDS AND RATES (continued)
 2010
    
    
    2009
    
    
    2008Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Liabilities
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    RateInterest-bearing
liabilities:INT DDA, MMF & Savings
    
    $
    240,479
    
    
    $
    1,254
    
    
    
    0.70
    %
    
    $
    187,436
    
    
    $
    1,481
    
    
    
    1.05
    %
    
    $
    198,535
    
    
    $
    2,220
    
    
    
    1.49
    %Time deposits
    
    
    108,531
    
    
    
    1,520
    
    
    
    1.87
    %
    
    
    109,760
    
    
    
    2,395
    
    
    
    2.91
    %
    
    
    103,729
    
    
    
    3,012
    
    
    
    3.87
    %Federal funds purchased,
securities sold under
agreements to repur-
chase and other short-
term borrowings
    
    
    11,623
    
    
    
    18
    
    
    
    0.21
    %
    
    
    12,771
    
    
    
    31
    
    
    
    0.32
    %
    
    
    20,028
    
    
    
    290
    
    
    
    1.93
    %Total interest-bearing
liabilities
    
    $
    360,633
    
    
    $
    2,792
    
    
    
    1.03
    %
    
    $
    309,967
    
    
    $
    3,907
    
    
    
    1.68
    %
    
    $
    322,292
    
    
    $
    5,522
    
    
    
    2.28
    %Noninterest-bearing
liabilities:Deposits
    
    
    79,454
    
    
    
    
    
    
    
    
    
    
    
    82,374
    
    
    
    
    
    
    
    
    
    
    
    90,603Other liabilities
    
    
    8,506
    
    
    
    
    
    
    
    
    
    
    
    8,945
    
    
    
    
    
    
    
    
    
    
    
    7,057Total liabilities
    
    
    448,593
    
    
    
    
    
    
    
    
    
    
    
    401,286
    
    
    
    
    
    
    
    
    
    
    
    419,952Stockholders
equity
    
    
    51,592
    
    
    
    
    
    
    
    
    
    
    
    49,422
    
    
    
    
    
    
    
    
    
    
    
    49,818Total liabilities and
stockholders
equity
    
    $
    500,185
    
    
    
    
    
    
    
    
    
    
    $
    450,708
    
    
    
    
    
    
    
    
    
    
    $
    469,770Net interest income/
margin-tax
equivalent
    
    
    
    
    
    $
    12,160
    
    
    
    3.24
    %
    
    
    
    
    
    $
    11,206
    
    
    
    3.32
    %
    
    
    
    
    
    $
    12,608
    
    
    
    3.58
    %Tax equivalent
adjustment:Loans
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    155Investment
securities
    
    
    
    
    
    
    575
    
    
    
    
    
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    223Securities available
for saleTotal tax equivalent
adjustment
    
    
    
    
    
    
    690
    
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    378Net interest
income
    
    
    
    
    
    $
    11,470
    
    
    
    
    
    
    
    
    
    
    $
    10,828
    
    
    
    
    
    
    
    
    
    
    $
    12,230
  22




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TABLE 2
 TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS
   Quarter ended September 30, 20102010 Compared to 2009
    
    
    2009 Compared to 2008Increase(Decrease) Due To
    
    
    Increase(Decrease) Due ToVolume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    NetInterest income on:Loans
    
    $
    6,630
    
    
    $
    (87
    )
    
    $
    6,543
    
    
    $
    8,502
    
    
    $
    (596
    )
    
    $
    7,906Investment securities:Taxable
    
    
    35,568
    
    
    
    (117
    )
    
    
    35,451
    
    
    
    (57,507
    )
    
    
    (2,509
    )
    
    
    (60,016
    )Exempt from Federal
income tax
    
    
    9,434
    
    
    
    256
    
    
    
    9,690
    
    
    
    4,111
    
    
    
    96
    
    
    
    4,207Securities available for
sale:Taxable
    
    
    (8,900
    )
    
    
    (240
    )
    
    
    (9,140
    )
    
    
    29,537
    
    
    
    532
    
    
    
    30,069Other interest earning
assets
    
    
    30,710
    
    
    
    67
    
    
    
    30,777
    
    
    
    
    
    
    
    
    
    
    
    Federal funds sold and
securities purchased
under agreements to
resell
    
    
    (26,360
    )
    
    
    (40
    )
    
    
    (26,400
    )
    
    
    4,181
    
    
    
    (540
    )
    
    
    3,641Total
    
    $
    47,082
    
    
    $
    (161
    )
    
    $
    46,921
    
    
    $
    (11,176
    )
    
    
    (3,017
    )
    
    $
    (14,193
    )Interest expense on:Savings deposits
    
    $
    53,043
    
    
    $
    (227
    )
    
    $
    52,816
    
    
    $
    (11,099
    )
    
    $
    (739
    )
    
    $
    (11,838
    )Time deposits
    
    
    (1,229
    )
    
    
    (875
    )
    
    
    (2,104
    )
    
    
    6,031
    
    
    
    (617
    )
    
    
    5,414Federal funds purchased,
and securities sold
under agreements to
repurchase
    
    
    (1,148
    )
    
    
    (13
    )
    
    
    (1,161
    )
    
    
    (7,257
    )
    
    
    (259
    )
    
    
    (7,516
    )Total
    
    $
    50,666
    
    
    $
    (1,115
    )
    
    $
    49,551
    
    
    $
    (12,325
    )
    
    $
    (1,615
    )
    
    $
    (13,940
    )Changes in net interest
income-tax equivalent
    
    $
    (3,584
    )
    
    $
    954
    
    
    $
    (2,630
    )
    
    $
    1,149
    
    
    $
    (1,402
    )
    
    $
    (253
    )
   23




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TABLE 3
 SECURITIES AVAILABLE FOR SALE AND PORTFOLIO SECURITIES
  SEPTEMBER 30,2010
    
    
    2009
    
    
    2008Securities available for saleU. S. Treasury and other U. S. Government agencies
    
    $
    105,405
    
    
    $
    49,076
    
    
    $
    26,982Obligations of states and political subdivisionsMortgage-backed securitiesOther securities
    
    
    124
    
    
    
    116
    
    
    
    72Total securities available for sale
    
    $
    105,529
    
    
    $
    49,192
    
    
    $
    27,054Portfolio securitiesU. S. Treasury and other U. S. Government agencies
    
    $
    97,192
    
    
    $
    123,456
    
    
    $
    164,594Obligations of states and political subdivisions
    
    
    28,054
    
    
    
    16,715
    
    
    
    8,102Mortgage-backed securitiesOther securities
    
    
    900
    
    
    
    900
    
    
    
    600Total investment securities
    
    $
    126,146
    
    
    $
    141,071
    
    
    $
    173,296Total securities available for sale and investment securities
    
    $
    231,675
    
    
    $
    190,263
    
    
    $
    200,350
  24




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TABLE 4
 MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE AND
INVESTMENT SECURITIES
  MaturingAfter

    
    
    
    
    
    
    After 5 YrsWithin

    
    
    
    
    
    
    1 Yr But

    
    
    
    
    
    
    But Within1 Year

    
    
    
    
    
    
    Within 5 Yrs

    
    
    
    
    
    
    10 Yrs

    
    
    
    
    
    
    After 10 Yrs.CarryingAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    AmountSecurities
available for saleU.S. Treasury
and other U.S.
Government
agencies
    
    $
    4,002
    
    
    
    1.09
    %
    
    $
    5,016
    
    
    
    1.25
    %
    
    
    96,387
    
    
    
    2.99
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    105,405Other Securities
    
    
    124
    
    
    
    0.68
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    124Total securities
available
for sale
    
    $
    4,126
    
    
    
    1.77
    %
    
    $
    5,016
    
    
    
    1.25
    %
    
    $
    96,387
    
    
    
    2.99
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    105,529Investment securitiesU.S. Treasury
and other U.S.
Government
agencies
    
    $
    6,997
    
    
    
    4.38
    %
    
    $
    44,008
    
    
    
    2.45
    %
    
    $
    46,187
    
    
    
    2.63
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    97,192Obligations of states
and political
subdivisions
    
    
    837
    
    
    
    4.73
    %
    
    
    13,698
    
    
    
    4.16
    %
    
    
    9,891
    
    
    
    4.35
    %
    
    
    3,628
    
    
    
    5.95
    %
    
    
    28,054Other securities
    
    
    900
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    900Total investment
securities
    
    $
    8,734
    
    
    
    4.49
    %
    
    $
    57,706
    
    
    
    2.97
    %
    
    $
    56,078
    
    
    
    3.00
    %
    
    $
    3,628
    
    
    
    5.95
    %
    
    $
    125,246Total securities
available for sale
and investment
securities
    
    $
    12,860
    
    
    
    3.34
    %
    
    $
    62,722
    
    
    
    2.78
    %
    
    $
    152,465
    
    
    
    4.22
    %
    
    $
    3,628
    
    
    
    5.95
    %
    
    $
    231,675
   25




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##### Table of Contents



TABLE 5
 SECURITIES ANALYSIS
 SECURITIES AVAILABLE-FOR-SALE
    
    
    SECURITIES HELD-TO-MATURITYSEPTEMBER 30, 2010
    
    
    SEPTEMBER 30, 2010GROSS
    
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    
    GROSSUNREALIZED
    
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZEDAMORTIZED COST
    
    
    GAINS
    
    
    LOSSES
    
    
    FAIR VALUE
    
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY
SECURITIES
    
    $
    104,977
    
    
    $
    446
    
    
    $
    (18
    )
    
    $
    105,405
    
    
    $
    97,192
    
    
    $
    1,793
    
    
    $
    
    
    
    $
    98,985STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,054
    
    
    
    1,189
    
    
    
    (2
    )
    
    
    29,241OTHER SECURITIES
    
    
    72
    
    
    
    52
    
    
    
    
    
    
    
    124
    
    
    
    900
    
    
    
    
    
    
    
    
    
    
    
    900TOTAL
    
    $
    105,049
    
    
    $
    498
    
    
    $
    (18
    )
    
    $
    105,529
    
    
    $
    126,146
    
    
    $
    2,982
    
    
    $
    (2
    )
    
    $
    129,126
 SECURITIES AVAILABLE-FOR-SALE
    
    
    SECURITIES HELD-TO-MATURITYSEPTEMBER 30, 2009
    
    
    SEPTEMBER 30, 2009GROSS
    
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    
    GROSSUNREALIZED
    
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZEDAMORTIZED COST
    
    
    GAINS
    
    
    LOSSES
    
    
    FAIR VALUE
    
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY
SECURITIES
    
    $
    48,787
    
    
    $
    340
    
    
    $
    (51
    )
    
    $
    49,076
    
    
    $
    123,456
    
    
    $
    1,339
    
    
    $
    (38
    )
    
    $
    124,757STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,715
    
    
    
    592
    
    
    
    (4
    )
    
    
    17,303OTHER SECURITIES
    
    
    72
    
    
    
    44
    
    
    
    
    
    
    
    116
    
    
    
    900
    
    
    
    
    
    
    
    
    
    
    
    900TOTAL
    
    $
    48,859
    
    
    $
    384
    
    
    $
    (51
    )
    
    $
    49,192
    
    
    $
    141,071
    
    
    $
    1,931
    
    
    $
    (42
    )
    
    $
    142,960
 SECURITIES AVAILABLE-FOR-SALE
    
    
    SECURITIES HELD-TO-MATURITYSEPTEMBER 30, 2008
    
    
    SEPTEMBER 30, 2008GROSS
    
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    
    GROSSUNREALIZED
    
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZEDAMORTIZED COST
    
    
    GAINS
    
    
    LOSSES
    
    
    FAIR VALUE
    
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY
SECURITIES
    
    $
    27,018
    
    
    $
    19
    
    
    $
    (84
    )
    
    $
    26,953
    
    
    $
    164,594
    
    
    $
    1,333
    
    
    $
    (469
    )
    
    $
    165,458STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,102
    
    
    
    49
    
    
    
    (31
    )
    
    
    8,120OTHER SECURITIES
    
    
    72
    
    
    
    29
    
    
    
    
    
    
    
    101
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    600TOTAL
    
    $
    27,090
    
    
    $
    48
    
    
    $
    (84
    )
    
    $
    27,054
    
    
    $
    173,296
    
    
    $
    1,382
    
    
    $
    (500
    )
    
    $
    174,178
  26




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##### Table of Contents



TABLE 6
 LOAN PORTFOLIO
  2010
    
    
    2009
    
    
    2008Commercial & Industrial
    
    $
    31,868
    
    
    $
    26,135
    
    
    $
    27,236Real Estate
    
    
    154,527
    
    
    
    144,595
    
    
    
    124,460Consumer Loans
    
    
    29,330
    
    
    
    42,178
    
    
    
    44,356Other Loans
    
    
    1,084
    
    
    
    375
    
    
    
    580Total Loans
    
    $
    216,809
    
    
    $
    213,283
    
    
    $
    196,632
 TABLE 7
 LOAN MATURITIES & INTEREST RATE SENSITIVITY
  Remaining Maturity Fixed Rate3 months or less
    
    $
    22,901Over 3 months through 12 months
    
    
    34,308Over 1 year through 5 years
    
    
    146,226Over 5 years
    
    
    4,016Over 1 year but variable rate
    
    
    2,866Total loans
    
    $
    210,317
  27




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##### Table of Contents



TABLE 8
 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
  Quarter ended September 30,2010
    
    
    2009
    
    
    2008Beginning Balance
    
    $
    3,100
    
    
    $
    3,100
    
    
    $
    3,100Charge Offs:Commercial & Industrial
    
    
    128
    
    
    
    61
    
    
    
    75Real Estate
    
    
    237
    
    
    
    104
    
    
    
    61Consumer
    
    
    762
    
    
    
    515
    
    
    
    463Other
    
    
    
    
    
    
    
    
    
    
    Total Charge Offs
    
    
    1,127
    
    
    
    680
    
    
    
    599Recoveries:Commercial & Industrial
    
    
    95
    
    
    
    29
    
    
    
    35Real Estate
    
    
    21
    
    
    
    
    
    
    
    152Consumer
    
    
    387
    
    
    
    212
    
    
    
    167Other
    
    
    
    
    
    
    
    
    
    
    Total Recoveries
    
    
    503
    
    
    
    241
    
    
    
    354Net Charge Offs
    
    
    624
    
    
    
    439
    
    
    
    245Provision for Possible Losses
    
    
    585
    
    
    
    439
    
    
    
    245Ending Balance
    
    $
    3,061
    
    
    $
    3,100
    
    
    $
    3,100Total Loans Outstanding
    
    $
    216,809
    
    
    $
    213,283
    
    
    $
    196,632Average daily loans
    
    $
    214,411
    
    
    $
    207,781
    
    
    $
    199,279
 Percentages:
    
    2010
    
    
    2009
    
    
    2008Allowance for loan losses to end of quarter total loans
    
    
    1.4
    %
    
    
    1.5
    %
    
    
    1.6
    %Allowance for loan losses to average loans
    
    
    1.4
    %
    
    
    1.5
    %
    
    
    1.6
    %Allowance for loan losses to nonperforming assets
    
    
    35.9
    %
    
    
    98.2
    %
    
    
    416.7
    %Net charge offs to average loans
    
    
    0.3
    %
    
    
    0.2
    %
    
    
    0.1
    %
  28




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##### Table of Contents



TABLE 9
 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
  September 30,2010
    
    
    2009
    
    
    2008% Gross
    
    
    Loan Loss
    
    
    % Gross
    
    
    Loan Loss
    
    
    % Gross
    
    
    Loan LossLoans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    AllowanceOutstanding
    
    
    Allocation
    
    
    Outstanding
    
    
    Allocation
    
    
    Outstanding
    
    
    AllocationCommercial & Industrial
    
    
    6.01
    
    
    $
    184
    
    
    
    7.00
    
    
    $
    217
    
    
    
    14.80
    
    
    $
    459Real Estate
    
    
    66.02
    
    
    
    2,021
    
    
    
    47.33
    
    
    
    1,467
    
    
    
    5.30
    
    
    
    164Consumer
    
    
    24.11
    
    
    
    738
    
    
    
    36.34
    
    
    
    1,126
    
    
    
    45.87
    
    
    
    1,422Other
    
    
    3.85
    
    
    
    118
    
    
    
    2.22
    
    
    
    69
    
    
    
    22.58
    
    
    
    700Unallocated
    
    
    
    
    
    
    
    
    
    
    7.12
    
    
    
    221
    
    
    
    11.45
    
    
    
    355100
    %
    
    $
    3,061
    
    
    
    100
    %
    
    $
    3,100
    
    
    
    100
    %
    
    $
    3,100
 TABLE 10
 NONPERFORMING ASSETS
  September 30,2010
    
    
    2009
    
    
    2008Non-accrual Loans & Accruing Loans Past Due 90 Days or more
    
    $
    6,517
    
    
    $
    2,920
    
    
    $
    479Other Real Estate
    
    
    2,011
    
    
    
    238
    
    
    
    265$
    8,528
    
    
    $
    3,158
    
    
    $
    744Nonperforming Assets as % of Total Loans
    
    
    3.93
    %
    
    
    1.48
    %
    
    
    0.38
    %Non-accrual Loans & Loans Past Due 90 Days or More
as % of Total Loans
    
    
    3.01
    %
    
    
    1.37
    %
    
    
    0.24
    %
  29




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TABLE 11
 AVERAGE DEPOSITS
  Quarter Ended September 30,2010
    
    
    2009
    
    
    2008Non-interest bearing deposits
    
    $
    79,454
    
    
    $
    82,374
    
    
    $
    90,603Interest-bearing deposits
    
    
    240,479
    
    
    
    187,436
    
    
    
    198,535Interest-bearing time deposits
    
    
    108,531
    
    
    
    109,760
    
    
    
    103,729Total
    
    $
    428,464
    
    
    $
    379,570
    
    
    $
    392,867
 TABLE 12
 TIME DEPOSITS OF $100,000 OR MORE, MATURITY DISTRIBUTION
  Time remaining until maturity3 months or less
    
    $
    16,303Over 3 through 6 months
    
    
    19,882Over 6 through 12 months
    
    
    22,727Over 12 months
    
    
    9,100Total
    
    $
    68,012
  30




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TABLE 13
 SHORT-TERM BORROWINGS
  Daily
    
    
    Average
    
    
    MaximumSeptember
    
    
    Average
    
    
    Interest
    
    
    Month-EndBalance
    
    
    Balance
    
    
    Rate
    
    
    Balance2010Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    14,089
    
    
    $
    11,623
    
    
    
    0.21
    %
    
    $
    14,0892009Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    8,054
    
    
    $
    12,771
    
    
    
    0.32
    %
    
    $
    8,0542008Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    13,375
    
    
    $
    20,028
    
    
    
    1.93
    %
    
    $
    13,375
  31




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TABLE 14
 INTEREST SENSITIVITY
  0-3
    
    
    4-12
    
    
    1-5
    
    
    Over 5Months
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalAssetsInterest-earning assets:Loans, net of unearned income
    
    $
    29,352
    
    
    $
    34,308
    
    
    $
    149,092
    
    
    $
    4,016
    
    
    $
    216,768Investment securities
    
    
    4,226
    
    
    
    4,508
    
    
    
    57,706
    
    
    
    59,706
    
    
    
    126,146Securities available for sale
    
    
    4,126
    
    
    
    
    
    
    
    5,016
    
    
    
    96,387
    
    
    
    105,529Federal funds sold and securities
purchased under agreements to
resell
    
    
    10,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,070Total interest-earning assets
    
    $
    47,774
    
    
    $
    38,816
    
    
    $
    211,814
    
    
    $
    160,109
    
    
    $
    458,513Noninterest-earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,312
    
    
    
    54,312Total assets
    
    $
    47,774
    
    
    $
    38,816
    
    
    $
    211,814
    
    
    $
    214,421
    
    
    $
    512,825Liabilities and stockholders equityInterest-bearing liabilities:Int DDAs, MMF, Savings deposits
    
    $
    29,949
    
    
    $
    89,845
    
    
    $
    119,730
    
    
    $
    
    
    
    $
    239,524Time deposits
    
    
    26,548
    
    
    
    67,914
    
    
    
    18,320
    
    
    
    
    
    
    
    112,782Federal funds purchased, and securities
sold under agreements to repurchase
    
    
    14,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,089Total interest-bearing liabilities
    
    $
    70,586
    
    
    $
    157,759
    
    
    $
    138,050
    
    
    $
    
    
    
    $
    366,395Noninterest-bearing deposits
    
    
    9,758
    
    
    
    30,686
    
    
    
    40,892
    
    
    
    
    
    
    
    81,336Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,364
    
    
    
    11,364Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,730
    
    
    
    53,730Total liabilities and
stockholders equity
    
    $
    80,344
    
    
    $
    188,445
    
    
    $
    178,942
    
    
    $
    65,094
    
    
    $
    512,825Interest sensitive gap
    
    $
    (32,570
    )
    
    $
    (149,629
    )
    
    $
    32,872
    
    
    $
    149,327Cumulative interest sensitive gap
    
    $
    (32,570
    )
    
    $
    (182,199
    )
    
    $
    (149,327
    )
    
    $
    Cumulative interest sensitive gap
as a percent of total assets
    
    
    -6.35
    %
    
    
    -35.53
    %
    
    
    -29.12
    %
    
    
    0.00
    %
  32




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TABLE 15
 CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND
OFF-BALANCE SHEET ARRANGEMENTS
  PAYMENTS DUE INONE YEAR OR
    
    
    ONE TO
    
    
    THREE TO
    
    
    OVER FIVELESS
    
    
    THREE YEARS
    
    
    FIVE YEARS
    
    
    YEARS
    
    
    TOTALDeposits without a
stated maturity
    
    $
    160,238
    
    
    $
    80,311
    
    
    $
    80,311
    
    
    $
    
    
    
    $
    320,860Consumer certificates
of deposit
    
    
    94,462
    
    
    
    14,047
    
    
    
    4,273
    
    
    
    
    
    
    
    112,782Federal funds borrowed
& repurchase agreements
    
    
    14,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,089Operating leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 COMMITMENTS
 The following table details the amounts and expected maturities of significant commitments as of September 30, 2010:
 ONE YEAR OR
    
    
    ONE TO
    
    
    THREE TO
    
    
    OVER FIVELESS
    
    
    THREE YEARS
    
    
    FIVE YEARS
    
    
    YEARS
    
    
    TOTALCommitments to extend
credit:Commercial
    
    $
    7,271
    
    
    $
    122
    
    
    $
    
    
    
    $
    
    
    
    $
    7,393Residential real estate
    
    
    2,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,333Revolving home equity
and credit card lines
    
    
    124
    
    
    
    171
    
    
    
    785
    
    
    
    
    
    
    
    1,080Other
    
    
    6,746
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,746Standby letters of credit
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    258
  33




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in Internal Controls
  34




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. (Removed and Reserved)
 
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1
    
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
  35




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SIGNATURES
  MERCHANTS & MARINE BANCORP, INC.Date:  November 12, 2010
    By:
    /s/ Royce CumbestRoyce Cumbest, Chairman of the BoardPresident and Chief Executive OfficerDate:  November 12, 2010
    By:
    /s/ Elise BourgeoisElise Bourgeois, Senior Vice President,Cashier and Chief Financial Officer  36